Russia hit tops $8bn for European banks pulling back

European banks are counting the rising cost of Russia’s invasion of Ukraine as they brace for a wave of defaults and write down the value of their operations in the country.
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European banks are counting the rising cost of Russia’s invasion of Ukraine as they brace for a wave of defaults and write down the value of their operations in the country.

Led by Societe Generale SA and UniCredit SpA, the region’s lenders have so far flagged a hit of $8.6 billion to their earnings from the war. The latest bank to add to the tally, ING Groep NV on Friday said it set aside almost $900 million to account for risks in the country. Italy’s Intesa Sanpaolo SpA is expected to outline its damage later on Friday.

The economic impact of the war is already cascading across the world as commodity prices spike and corporate supply chains are disrupted. After years of benefiting from rapid growth in Russia, European banks are now asking themselves if it’s still worth doing business in the world’s most sanctioned country. At the same time, they’re divided on how broad the damage to the economy will be, meaning some banks face further costs if defaults spike.

As banks grapple with the uncertainty surrounding the broader economic damage, chief risk officers of several major European lenders are holding meetings among themselves and with regulators to discuss the reliability of their models and provisioning, according to people familiar with the matter. One regulatory official, who spoke on condition of anonymity, said banks will probably stash more funds in coming quarters.

“Corporate insolvencies in our markets will probably rise” this year on the back of soaring energy prices, high inflation and supply-chain disruptions, Commerzbank AG Chief Executive Officer Manfred Knof said Friday.

UniCredit said on Thursday that it can absorb macroeconomic knock-on effects from the war in its wider business thanks to its “strong” capital levels, asset quality and prudent loan loss reserves. The Milan-based lender, one of the European banks with the biggest presence in Russia, took a 1.85 billion-euro ($2 billion) hit related to the country as it weighs whether to exit.

Others, including Deutsche Bank AG, are focusing their provisioning more on Russian loans. The German lender said it considers it to be an “unlikely downside case” that supply chain bottlenecks translate into losses.

Societe Generale’s central scenario is for a “soft landing” of the European economy, CEO Frederic Oudea said on Bloomberg TV. The French bank last month agreed to sell its Rosbank PJSC unit to the investment firm of Vladimir Potanin’s, Russia’s richest man, taking a hit of about 3 billion euros to exit. Oudea said on Thursday that it would be reflected in second-quarter results.

Several European banks such as UniCredit and Commerzbank also used the first quarter to add an extra layer of cash to its credit provisions, known as “overlay,” as a result of worsened economic forecasts, rather than actual deteriorations in the loan portfolio. That pushed up the amount banks are setting aside for bad loans to the highest since the onset of the Covid-19 pandemic in 2020.

Banks are also prodding clients and drilling deep into their balance sheets to see which may have trouble paying back loans as the fallout widens. Raiffeisen Bank International AG, a big lender in eastern Europe and one of the largest foreign banks in Russia alongside UniCredit, highlighted 1.8 billion euros of exposure to auto parts and equipment and 1.2 billion euros related to chemicals and fertilizer industry as being most at risk.

Meanwhile, banks remain divided on whether to quit Russia altogether. UniCredit and Austria’s Raiffeisen are still weighing their options, with Raiffeisen saying on Wednesday that its received interest from parties seeking to buy its Russian business. Lenders with smaller outposts are already winding down in the country.

© 2022 Bloomberg

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